ECON304: Economic Development

Unit 1: What Is Economic Development?The meaning of the term economic development is not as clear as you
might expect. As we learned in earlier economics courses, economies are
complex. Many internal and external factors impact whether an economy is
able to grow, provide employment to its working-age population, and
reduce poverty. Furthermore, different people may hold different views
as to what constitutes development. Some may believe that development
means higher incomes. Others might believe that development is a change
in the structure of society or institutions. Still others might consider
development an improvement in the health and education outcomes of a
given population. Economics tells us that all of these factors are
important in defining economic development population; thus, before
considering the major theories of economic development, it is important
to understand the key terms and concepts used in the literature of
economic development and to determine what is meant by these
concepts.

Development is not simply growth; it is economic growth plus
sustainable changes in people’s quality of life. Economists usually
measure economic growth in terms of the rate at which GDP changes over
time. There is little argument about this measure of growth. A high real
GDP growth relative to population growth is necessary to provide
schools, hospitals, housing, and adequate nutrition. However, a high per
capita GDP growth is not sufficient; it must be accompanied by
structural changes that improve welfare. Therein lies the difference
between economic growth and economic development. It is important to
understand the factors that promote this growth, but it is just as
important to understand the factors that change people’s quality of
life, allowing people to make choices and to participate in the
economy.

Unit 1 Time Advisory
Completing this unit should take you approximately 12 hours.

☐ Subunit 1.1: 3.5 hours

☐ Subunit 1.2: 1.25 hours

☐ Subunit 1.3: 3.25 hours

☐ Subunit 1.4: 1.5 hours

☐ Subunit 1.5: 0.5 hours

☐ Discussion: 2 hours

Unit1 Learning Outcomes
Upon successful completion of this unit, you should be able to:
- define economic development;
- distinguish between economic growth and economic development;
- identify some of the stylized facts of developing countries;
- discuss the link between population growth and economic development;
and
- explain the link between income, poverty, and income distribution.

1.1 Origin of the Concept of Economic DevelopmentThe idea and process of economic development involves the deliberate
manipulation of forces within the control of humans to alter economic
outcomes instead of accepting what nature provides by way of sustenance
as inevitable. Some argue that one major reason for underdevelopment is
the fatalistic attitude of people who live in poor countries and their
unwillingness to alter what has been. A recent paper by Easterly and
Levine suggests that a great amount of economic development today is the
result of European settlement outside Europe. The argument goes that
these settlements “shaped institutional, educational, technological,
cultural, and economic outcomes.” (2012) As with many theories, or
rather hypotheses, in economic development, this one is not easy to
accept. For many in the developing world, this smacks of Eurocentricism.
Nonetheless, casual and empirical observations suggest that education
introduced by European settlers had a lot to do with changing the
fatalistic attitude of many traditional societies, ushering in human
capital development in ways that had not been the case before. As you
read through the various texts, you will come across many ideas that may
sound self-serving to one group or the other. Your ability to discern
what may be correct, based on empirical evidence is as much a part of
your education as your knowledge of the various theories.

1.1.1 Defining DevelopmentBy the time you finish reading this section, you should feel
comfortable defining economic growth and economic development as well as
distinguishing between the two. The piece titled “Approach to
Development” is a good opener, and the exercise should help you
appreciate the fact that development is a process, a continuum of
changes which eventually brings a country to a point at which it is
classified as developed. As a continuum, one can always argue about the
precise point at which developing has ended and developed has begun. The
US is obviously a developed country, yet some parts of it are no
different from a typical developing country. Azerbaijan, Brazil, China,
India, and South Africa are all developing countries but some parts of
these countries can hardly be called developing.

Instructions: Read the brief introductory information for a
definition of developing countries and developed countries.
Complete the activities, which will help you practice identifying
which countries are developed and which are not. Once you’ve
completed Activities 1–3, you may check your response against the
answer key in the “Memorandum” section.

Instructions: Read this chapter for an overview on development. For
further clarification on issues raised in this chapter, please refer
to the accompanying
glossary.
This article introduces the concept of development, providing both
what might be considered the traditional and more modern definitions
of development.

Reading this chapter should take approximately 30 minutes.

Terms of Use: This material has been reposted by the kind
permission of the World Bank, and the original version can be found
here.
Please note that this material is under copyright and cannot be
reproduced in any capacity without explicit permission from the
copyright holder.

1.1.2 Historical Foundations of Theories of Economic DevelopmentThe perennial effort to live from one day to the next without the fear
of hunger or danger has always preoccupied humankind. Societies have
always sought ways to overcome these obstacles. They did so by
organizing in ways they felt would give them the best chance of
survival. Some were more successful than others. The successful ones
gave economists the impetus to study them and apply lessons to others.
Our economic systems are ways of organizing production activities.
Sometimes it is not easy to differentiate the way we govern ourselves
from the way we organize productive activities. From feudalism to
capitalism to communism and in between, the social system has been as
much about government as about allocating the scarce resources. The
piece below traces the historical origins of economic development.

Reading: University of Iowa, Center for International Finance and
Development: E-Book on International Finance & Development: Ricardo
Contreras’ “How the Concept of Development Got Started”
Link: University of Iowa, Center for International Finance and
Development: E-Book on International Finance &
Development: Ricardo Contreras’ “How the Concept of Development
Got
Started” (HTML
or PDF)

Instructions: Read this chapter, which traces the historical
foundations of the current debate on economic development from the
13th to the 20th centuries. Pay particular
attention to the forces behind the emergence of the
classical/neo-classical tradition and the historical materialism
school. You can access the PDF by choosing the “Download PDF” link
next to the Adobe Icon at the top of the article.

Reading this chapter should take approximately 1 hour.

Terms of Use: Please respect the copyright and terms of use
displayed on the webpages above.

1.2 Comparing Levels of Development between Regions of the WorldAlthough the term developing countries refers to a group of countries,
no two countries are alike. The stylized facts of developing countries
fit them in aggregate, but on just about any measure of development, you
will find that some of the facts do not apply to some of the countries.
Some developing countries experience frequent extreme poverty and
hunger, whereas others rarely do. Some developing countries have low
literacy rates, whereas others have high literacy rates. Some have low
doctors per thousand of population, whereas others do not. The contrast
between development and the absence of development will be between the
poor developing countries and rich developed countries. The UK is a
developed country compared to Ethiopia, but how does Ethiopia compare to
say Haiti? They are both developing countries, and in regard to some
measures, Ethiopia will do better and on others Haiti may do better than
Ethiopia.

Instructions: Read this chapter, which explains how different
regions throughout the world compare on common measures of levels of
development.

Reading this chapter should take approximately 30 minutes.

Terms of Use: This material has been reposted by the kind
permission of the World Bank, and the original version can be found
here. Please
note that this material is under copyright and cannot be reproduced
in any capacity without explicit permission from the copyright
holder.

Instructions: Listen to this guest lecture for a brief comparison
of how individual nations compare to each other in terms of
development. Keep in mind that this is just an overview; try to
identify other aspects that would make for good comparison points
between nations.

Watching this lecture and pausing to take notes should take
approximately 45 minutes.

1.3 Population Growth in the Developing WorldPopulation growth is both a boon and a bane for economic development.
First, it is from the population that society derives the labor force.
Thus, without population growth, this essential factor of production
will dwindle. Second, it is from the population that society derives
entrepreneurs with the qualities to take risks and to organize
production. On the other hand, if the population grows too quickly, it
poses problems. The population must be cared for, be educated over a
long period, be made ready for participation in economic activity, and
be prepared to take care of the aging. Is there an ideal population
growth rate? Are the poor countries poor because the populations are
growing too fast? These are important issues of interest to the
development economist.

Instructions: Read this chapter, which explains the importance of
population growth in the dynamics of development and
underdevelopment. This article also shows how recent trends in
population growth differ between regions in the world.

Reading this chapter should take approximately 30 minutes.

Terms of Use: This material has been reposted by the kind
permission of the World Bank, and the original version can be found
here. Please
note that this material is under copyright and cannot be reproduced
in any capacity without explicit permission from the copyright
holder.

Instructions: Watch this lecture. The idea that poorer countries’
income per capita will grow faster than richer countries’ income per
capita is known as convergence. Does that mean that eventually all
countries will converge to the same level of income? The rate at
which China, India, and Brazil have been growing has led several
people to conclude that eventually China will have a higher (per
capita) income than the US. In this invigorating guest lecture, the
speaker compares the growth of US to the growth of emerging nations
such as China and India and makes some predictions about when these
economies are likely to catch up to the US economy. He also points
out existing roadblocks in these economies. As you listen, think
about the factors that promote and inhibit growth.

Watching this lecture and pausing to take notes should take
approximately 45 minutes.

Instructions: Watch this lecture. You previously listened to Hans
Rosling’s talk on the rise of Asia. In this lecture, Martin Jacques
talks about China’s road to success. Jacques explains the factors
that render the country distinct from its western counterparts, the
reasons that have led to its success, and the factors that will
determine its future.

Watching this lecture and pausing to take notes should take
approximately 45 minutes.

Instructions: Read this chapter, which tracks trends in economic
growth according to a number of classifications including geography,
natural resource endowment, and income level. When reviewing this
reading, start to consider the origin of the differences in economic
growth rates for these different countries.

Reading this chapter should take approximately 30 minutes.

Terms of Use: This material has been reposted by the kind
permission of the World Bank, and the original version can be found
here. Please
note that this material is under copyright and cannot be reproduced
in any capacity without explicit permission from the copyright
holder.

Instructions: Watch this lecture. This lecture introduces another
case study in the context of a developing country’s recent
growth. In this guest lecture, the speaker presents four categories
of ideas that help shape the development of a nation. He explains
these ideas in the context of India’s progress and emphasizes those
that are important for its continued progress.

Watching this lecture and pausing to take notes should take
approximately 45 minutes.

1.4 Poverty and Income InequalityPer capita GDP is not always a good measure of the level of poverty or
of wealth. First, many development practitioners consider poverty to be
multi-dimensional, meaning that is it not only defined by how much
income a household has to spend. Second, GDP per capita does not
consider the impact of inequality in the distribution of income, which
may mask problems of poverty. A high per capita GDP may be distributed
such that a small fraction of the population gets a large fraction of
the income. This may result in a large percentage of the population
being poor even though the country has a high per capita GDP. Economists
have come up with an ingenuous way of measuring this concept by using
the Lorenz curve. The Lorenz curve is a square graph with the cumulative
percent of income on the vertical axis and the cumulative percent of the
population receiving the cumulative percent of income on horizontal
axis. For example, if the first 20 percent of the population receives 20
percent of income, then the coordinates will put that point on the line
45o from the origin (the line from the origin which bisects the 90
degree angle). If the first 20 percent of the population receives 5% of
the income, then the coordinates will be below the 45o line. Zero
percent of the population will receive zero percent of the income, and
naturally 100 percent of the population will receive 100 percent of
income; thus, if we plot the coordinates of the cumulative percentage of
population against the percent of income it receives, then the line will
start from the origin and end at the vertex of the parallel to the
horizontal axis and the line parallel to the vertical axis. Now, if the
bottom 20 percent of the population receives 5% of the cumulative income
and the bottom 40% receives 25% of cumulative income, then these points
will lie below the 45o line. If we continued till we have covered 100
percent of the population and 100 percent of income, we would have a new
line which lies below the 45o line. The area between this line and the
45o line divided by the area formed by the triangle to the left of the
45o line is called the Gini Coefficient (named after Corrado Gini, a
mathematician). This coefficient gives us a sense of the distribution of
income. If the coefficient is zero, then there is equal distribution of
income or perfect distribution of income. The bigger the coefficient,
the more unequal income is distributed.

Instructions: Read these articles. The first article describes a
number of definitions of poverty and analyzes variations in poverty
globally. The second article compares inequality differentials
between countries and examines what impact inequality might have on
economic growth.

Reading these articles should take approximately 45 minutes.

Terms of Use: The articles above have been reposted by the kind
permission of World Bank and can be viewed in their original forms
here and
here.
Please note that this material is under copyright and cannot be
reproduced in any capacity without explicit permission from the
copyright holder.

Instructions: Watch this lecture. In this guest lecture, the
speaker, economist Paul Collier, contends that the fundamental
challenge of development at present is to find a way to give hope to
the billion people that have been stuck in stagnant economies. In
this regard, he advances a bold, compassionate plan for closing the
gap between the rich and the poor.

Watching this lecture and pausing to take notes should take
approximately 45 minutes.

1.5 Industrialization in the Developing World
- Reading: The World Bank’s Beyond Economic Growth:
“Industrialization and Postindustrialization”
Link: The World Bank’s Beyond Economic Growth:“Industrialization
and
Postindustrialization” (PDF)

Instructions: Read this chapter, which looks at how the structure
of countries’ economies tends to change over the course of the
development process. Following the decolonization of most of the
developing world after WWII, many former colonized poor countries
saw their path to development in terms of industrialization.
Therefore, these countries embarked on extensive industrialization.
Along with the issue of industrialization as a means to develop was
whether the process was to be government led or private sector led.
If it was to be government led, how was it to be financed? In Latin
America, some countries decided that it was to be government led and
its deficit financed. The result was a period of rapid inflation and
poor economic performance. This text is a primer on the subject.
While reading this text, consider how this evolution has differed
during various historical periods and how new technologies will
impact this change in the future.
Reading this chapter should take approximately 30 minutes.
Terms of Use: This material has been reposted by the kind
permission of the World Bank, and the original version can be found
[here](http://www.worldbank.org/depweb/english/beyond/global/chapter9.html). Please
note that this material is under copyright and cannot be reproduced
in any capacity without explicit permission from the copyright
holder.

Instructions: After reviewing the course materials for this unit,
please respond to the following questions by posting to the course
discussion board. Please feel free to start your own discussions as
well as review and respond to other students’ postings.
1. Economic growth is more important than economic development.
Economic development is more important than economic growth. Which
do you think is more important, and why? Provide supporting evidence
for your reasons.
2. People who live in developing countries are by definition
poor. Why might this be true or why might this be false? Explain
your reasons.
Completing this activity should take approximately 2 hours.